During a four-part lecture this week at George Washington University, Federal Reserve Chairman Ben Bernanke's outreach to educate the public about what the Fed is doing and why led to a renewed attack on those who advocate a gold standard.

The former Princeton University economics professor used his first lecture to explain why he firmly believes, "The gold standard would not be feasible for both practical resources and policy reasons."

"I understand the impulse, but I think if you look at actual history, the gold standard did not work well," Bernanke stressed in his lecture.

BERNANKE'S POINTS

In his slide presentation, Bernanke stressed the following points regarding what he feels are problems with the gold standard:

--The strength of a gold standard is its greatest weakness too: Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions.

--All countries on the gold standard are forced to maintain fixed exchange rates. As a result the effects of bad policies in one country can be transmitted to other countries if both are on the gold standard.

--If not perfectly credible, a gold standard is subject to speculative attack and ultimate collapse as people try to exchange paper money for gold.

--The gold standard did not prevent frequent financial panics.

--Although the gold standard promoted price stability over the very long run, over the medium run, it sometimes caused periods of inflation and deflation.

And part of the conclusion:

When asked by a student why there is still an argument for returning to the gold standard and is it possible to do so, Bernanke said the argument has two parts. "One is the desire to maintain the value of the dollar. ... So the argument is that paper money is inherently inflationary, so if we have a good standard tool, you won't have deflation [Ed: surely he means inflation]."

"And as I said, that's true to some extent over long periods of time. But from a year-to-year basis, it's not true, and so looking at history is helpful there."

"The other reason, I think that gold standard advocates want to see a return to gold, is that it removes discretion, it doesn't allow the Central Bank to respond with monetary policy, for example to booms and busts, and the advocates of the gold standard say it's better not to give that flexibility to a central bank."

"I think though that the gold standard would not be feasible for both practical and policy reasons," Bernanke advised. "On the practical side, it is just a simple fact that there is not enough gold to meet the needs of a global gold standard and achieving that much gold would be very expensive, cost a lot of resources."

"But more fundamentally that that is that the world has changed, so the reason the Bank of England could maintain the gold standard even though it had a very small number amount of gold reserves was that everybody knew that they were going to-their first, second, third and fourth priority was staying on gold and that they had no interest in any other policy objective."

"But once there was concern that the Bank of England might not be fully committed, then there as a speculative attack that drove them off gold."

"So in a modern world, the commitment to the gold standard would mean that we are swearing that under no circumstances, no matter how bad unemployment gets, are we not going to do anything about it using monetary policy," he said. "And if investors had one percent doubt that we would follow the promise, then they will have varying incentive to bring their cash and take out gold in this and in fact it will be a self-fulfilling prophecy."

Bernanke asserts "there's a good bit of evidence that the gold standard was one of the main reasons that the [Great] Depression was so deep and so long. And a striking fact is that the countries that left the gold standard early and gave themselves flexibility on monetary policy recovered much more quickly than the countries that stayed on gold until the bitter end."

David Fuller's view Mr Bernanke's lecture may have the effect of a red cape waved before an angry gold bull, for some people.

Preservation of purchasing power is the main reason why anyone would favour a gold standard. However, if we assume, hypothetically, that the US and other leading countries moved back on to a gold standard, I do not think many of us would like the deflationary consequences that followed. Also, a gold standard would almost certainly involve the confiscation of private holdings of bullion, as has occurred previously. Most of us would not like to lose our freedom to hold bullion.

I have long argued that we would never see the reintroduction of a gold standard because no leading government is likely to surrender control over its own money supply. For current reasons, just ask the Greeks or citizens of other peripheral Eurozone countries, struggling to cope with no more than a euro standard.

There would also be national security issues as it would not be difficult for rogue states to manipulate the price of bullion as an act of economic war.

The practical question for most of us who are interested in the price of gold is: what happens next? For this, please see my review - "What next for gold and silver?" - posted on Wednesday 14th March. Here are the up-to-date price charts (p&f, historic, monthly, weekly 10-year, weekly 5-year & daily)